Risk attitude, investments, and the taste for luxuries vs. necessities

Financial advisors generally assume that people differ in their risk attitudes, and they sometimes try to assess these attitudes with questionnaires about risks. But attitudes toward risks are influenced by many factors that are irrelevant to ultimate outcomes. Arguably, what is most important is the utility of money. Some people are satisfied with a no-frills retirement, while others hanker after travel, yachts, and large legacies. The latter group should take risks, if anyone should, as their utility for money is less concave, more linear. I report two questionnaire studies in which questions about risk itself were uncorrelated with answers to direct questions about the utility of money and with answers to questions about the taste for luxuries vs. necessities, which were correlated in reasonable ways with each other. Questions about risk may measure differences in the utility of risk itself, which might be more salient than it should be for determining optimal long-run investment strategies. ∗The work was supported by a grant from the U.S.-Israel Bi-national Science Foundation to J. Baron and I. Ritov. Address: Department of Psychology, University of Pennsylvania, 3720 Walnut St., Philadelphia, PA 19104–6241. Email: [email protected].